There are many solutions to a problem. It just it seems to me that my idea seems sound, not just by me being biased that it is me, but I see the evidence of it around me where I live. Poverty is a problem, and when people are faced with survival, they will break the law in order to get the things they need in order to survive. This is not the case with all crime, but a large portion, it is the case. I firmly believe that with the money that this country has, there should absolutely be no person living on the streets. Not only should one consider the entire budget of The United States, but consider as well the printing power that this country has. People don’t like the idea of paying for someone else to live; they would rather have their tax money go towards other things, especially considering how little reading people do on poverty. People figure that you can just take things into your own hands, and just get out of poverty. Since the majority of people in poverty stay in poverty, they are perceived to deserve to be there because they do not have the ability to get out. The whole premise of our economy, our philosophy of it, is that people with more ability should be paid more. So if people don’t have the ability to get out of poverty, then they should stay there.

But I just argue it is the decent thing to do, and we have the money to do it. People don’t trust the government, as they should, but I think this would be a key point to use the power of the government. Church’s do wonderful work, but they don’t have the capital to do what I am proposing needs to be done. Private charities I just do not trust for the life of me. The profit incentive is just too much with those organizations, and exploit their message to make more money for themselves at the expense of the people they were paid to help. This is why I think the government is the only entity that can really pull this off on a national level.

I have found a basic relationship where I live. There are extremes in income levels throughout the city and county. What I have found, is that the neighborhoods seem to be in conditions accordance with different schools, and the better the schools create better neighborhoods. It’s a symbiotic relationship. Meaning, both entities influence one another in either a positive or negative way. Considering that most schools, not all, are funded by property taxes, it makes sense that better schools create better neighborhoods and vise versa. However, it is in my belief, that with this system comes a feedback loop in either the positive or negative way.

In regards to a positive feedback loop, good academic performance creates good test scores, good funding, and good advertisement for the school. It puts the district or neighborhood in demand. Raising prices, which increases funding for the school. There is even a district where I live, that actually volunteered to raise prices for the school district. The community recognizes the strength of education, and wants good education for their families.

On the negative side of things, poor test scores or academic performance, lowers the demand of the district in general. This decreases the price of the real estate in the area. With less money being funded to the schools, cuts have to be made, making learning conditions worse for the students, increasing the likelihood of poor test scores. This makes property values go down, which further impacts the school.

There are other variables that impact property values. The big one for me that comes to mind is crime. The problem is crime would be alleviated if people were more educated, because they would decrease some if not most of poverty, by creating people that can land higher paying jobs, which again would decrease crime. It’s all interconnected.

In short, by increasing the quality of education in all areas, people would be prepared to not only make better decisions, but to go to college, get a degree, and land a higher paying job. This would create better communities to be apart of.

What is this idea?

It’s really basic. I think what makes the most sense, if you the reader, were to read my posts on government debt, to print the money required to fund schools in need, and schools that are the center of poverty. The funds would initially be used to modernize the facilities of the school. Good electrical, plumping, good gyms, technological science labs, I mean the works. There would also be money allocated, to hire better quality teachers. Hopefully there would be enough funds available, to try and keep class size low. With better facilities, and better teaching staff, it is up to the staff to provide favorable test scores. I will note, that I think it would be better to teach multiple subjects, rather than just a test. If you were to teach the kids well, the ACT or SAT would be just another test to study for. To take the entire year to teach this test, you rob the student’s potential of learning important aspects of our world and society.

Tax payers are going to want the money to be paid back. Essentially the school should be run like a business. If a teacher is under performing, make warnings, but then don’t be afraid to fire. All expenses, including the salaries of administration, should be termed “expenses.” The profits are then sent back to the government to be paid back in full over time. The incentive to pay back the government at a decent rate, is to have that money paid back into the school. Once the government is paid back, (yes there will be instances where schools will fail and should be learned from) the government can take a database of statistics on the program, and ultimately can be used to learn how to attack the issue of poverty further.

It’s a really basic idea, founded upon a basic relationship I have found in my community. At the very least, I would hope this idea could start a conversation on how to infuse government capital into education. We spend trillions of dollars for wars, yet we refuse to educate our own people. And honestly, I think that it is intentional. As a Rockefellar was caught saying, “I want a nation of workers, not thinkers.”

The only thing we can really do, is express our voice to the people in power. Honestly, I have lost hope there, but I am going to write to my representatives about this issue. Ultimately I think what gets a voice in Washington is money, but at least I will have the ease of mind knowing I did what I could to bring an idea that I have to fruition for America.

I have been busy to say the least, but as I have said in the past, I’ll never forget about this blog. I have been studying and discussing as well as reading discussions on modern economics. My goal is to write a formal essay with my overall understanding. It is actually progressing rather nicely. I have two more papers ready to be read, and I need to work hard to try and find a good source on The Fed. I have to be careful, because there is a lot of speculation. I will say, that my understanding of The Fed is not from good sources, and I know this because the information is not consistent. Therefore, I will try to refrain from talking about The Fed. Really, with the last two sources that I read, they both focused on The Treasury. People that even worked The Treasury didn’t understand how The Fed has their money. When The Treasury needed some money, it was provided in exchange for bonds by The Fed, and when those bonds expired, the account is credited closer to zero with the appropriate amount. There is no transfer of money. Again, this is based off of discussions rather than reliable texts.

So, what does national debt really mean? The National Debt, that everyone is concerned about, is total outstanding treasury securities, that are held by either The Fed, private banks, or private investors. Outstanding in this context means bonds that are issued and sold. That means, the number you can keep track of by looking online, are the actual amount of bonds bought. There maybe still some bonds on the market! Treasury securities, or otherwise called Treasury Bonds, T Bonds, is a bond backed by the United States Government. It is literally the safest USD asset on the market. It is safer than money itself. If someone is a billionaire, and they had cold hard cash, if banks were to go under, they may lose that money. The Government has the resources of The Treasury and The Fed to provide a safety net for the Treasuries that are purchased. Treasuries are safer than money. Bonds in general have a lifetime associated with them. So the text mentions one month, three month, one year, five years, to even thirty years. In other words, if I buy a thirty year bond, I won’t be paid back with the interest until thirty years later. By agreement, at certain time intervals, the interest on the bond changes in accordance to inflation and other factors.

That means, there are treasuries that have various lifetimes. Which means, not all treasuries have to be repaid at once. Only a fraction of the outstanding treasuries retire. Once these treasuries retire, they are removed from the system. However, treasuries are also printed. What happens, as described by this text, is The Treasury will have a certain amount of money in their account at The Fed. They use that money to pay off treasuries that are expiring, and then the rest is used for deficit spending. That money, some economists theorize has a multiplier. This means, that for every dollar that is deficit spent in the economy, since it passes through so many hands, it will wind up at around 2.5 dollars. In any case, by the end of the day, the same amount of money that The Treasury spent on deficit spending and expiring treasuries, is put back into its account with the purchase of more bonds. The Treasury receives money for the bonds that it issues.

At this point in the book, I was wondering about the interest. It is common for investors once their treasuries expire, to take the interest and then reinvest the principle into treasuries again. I started to think that the paid interest on bonds was expanding the money supply. But there is something to take into consideration. First, The Treasury can get bank money whenever they want by selling bonds to The Fed. Second, The Treasury can control how many securities it is putting on the market. Thirdly, by collaborating when The Fed they can manipulate interest rates on the bonds. The Fed can declare what the overall interest rate is, affecting all interest rates in some what or another. But that isn’t how The Fed manipulate bond interest. The way that interest rates are determined on treasuries, is by an auctioning process. The author did not go into great detail exactly how it works, because I suppose he didn’t want to overwhelm the reader, and it maybe extremely complicated just to determine interest rates. I am inferring, that the overall supply of the bonds have an effect on the resulting interest rate. Therefore, The Treasury while getting instant bank money from The Fed also manipulates the interest rates on the bonds by the remaining supply of treasuries available for investing. Remember, the overall supply can be determined by The Treasury. What this means, is that The Treasury can always be in a favorable position. There is a specific example in the book, that directly addresses my issues with the bonds. It has huge implications. So I quote on page 49:

Interest payments do not affect the money supply. Suppose The Treasury pays 100 dollars of interest from its Fed account (talking about interest on the treasuries). That 100 dollars becomes cash flow to the holders of the treasuries. If 20 dollars is paid back to the government as income taxes, investors will be left will 80 dollars increase in their bank accounts. The Treasury then issues 80 dollars of new securities, with investors placing 80 dollars from their bank accounts to the treasuries, and The Treasury fully replenishes its account with The Fed from the 80 dollars from investors and 20 dollars from income taxes.

With people that don’t really follow the Modern Monetary Theory scene, this has huge implications. It has been explained in the community, that it is required by law for The Treasury to be in the black, or negative. Keep in mind it is technically true that The Treasury prints physical currency, but it does not create money electronically. The Treasury can only print treasury bonds. So, basically The Treasury exchanges money for bonds that it prints. The government uses the money from The Fed to deficit spend. Once the treasuries expire in The Fed account, money is credited, but obviously there is a perception that The Treasury prints faster than the treasuries retire. This deficit spending, is one of the primary ways that the money supply expands, and since The Treasury is by law to be in the black, that debt is understood to never be repaid. From what I gather in the community, the majority of the national debt is owned by The Fed.

I will get back to the thought I am about to say later, but that quote up above, shatters the perception in the MMT community. The author, was the Associate as well as The Secretary of Treasury. I think it is a very reliable source. First, he has stated numerous times, that The Treasury would have positive accounts. Second, he clearly says interest on bonds don’t expand the money supply. The Treasury prints bonds to The Fed to pay interest, and in combination of taxes and issuance of new treasuries, the money is put back to the account with The Fed. Thirdly, he uses taxes. This is actually contested by a paper of economists that I have read. They essentially say that in order for The Treasury to gain access to the money from printing securities, it has to send taxes to The Fed account. With the perception that I had at the time, and the majority I would say of the MMT community, the taxes are essentially destroyed. Simply because you are putting money into a deep black hole of negativity.

Well, it seems that The Treasury uses taxes.

Even though this particular source wasn’t 100 percent accurate, there was still some very valuable concepts discussed. It goes to show the nature of learning economics. There’s no pdf file that describes exactly how the economy works. So when I navigate the information world on figuring out how the economy works, I try to find credible sources, and try to refrain from taking the word of other people. I have already had instances where someone who seems to be more credible than me, is wrong in my eyes, simply from the readings that I have done. A lot of people try to logically reason the process of the economy based upon assumptions that they know of the time. What I have found out, is a lot of the time my assumptions are wrong. The only way is credible sources.

I got distracted.

So another perception of the MMT world is that The Fed owns pretty much all or most of the national debt. As of 2013, there was 11 trillion of national debt. 1.7 trillion was owned by The Fed, which means the rest, 9.3 trillion is owned by the private sector. So that’s trumped.

So the begging question, what expands the money supply?

One thing that is not contested, and that is thoroughly understood, is that bank loans expand the money supply. Banks create credit from nothing. Issuance of loans turn the wheel of the economy, and expands the money supply, which allows an expansive amount of purchasing of national debt. Finally, there is a huge black area of understanding that I have right now in the process of the economy. What encompasses most of that blackness, is The Fed. That’s my next project. I want to find a good, credible book, on The Fed. I have short papers to read as well, that have to do with overall economic policy, but I hope to one day solidify the process in my mind by reading a good book on The Fed and how it works. As the author put it, if he ever wanted money The Fed had it and would give it to him. How? So I still have a ways to go, but I have learned a lot.

There is one more thing that I want to touch base on. Foreign countries owning our debt (securities). Our debt, is the safest USD asset, a treasury bond. That bond, when it expires issues US currency. US currency can only buy goods and services in the US. If, these countries want to trade our currency for another, the person who bought all the US money, has the same problem. Do I buy goods and services in the US? Do I re-invest in the US? Or do I trade currencies? If he trades, then the person he traded with has the same problem. Put simply, that money is going to be used to drive the US economy in one way or another. It is good for us. It isn’t true that China can demand on their debt and it will bring our entire economy to a halt. The fact that China has trillions of dollars in US assets, means that’s trillions of dollars for us.

What is interesting is the author’s take on overall policy. When the economy is slow and needs recovering, then it is good to print securities to pay for securities. In fact, The Treasury has been printing securities to pay for securities since 1791! It helps boost the economy. When the economy is doing wonderful, he actually advocates for a more austerical philosophy. You can think austerity as the traditional view of the economy, or another way to say it, a state’s budget. A state can’t print their currency. So a state, like Missouri which is where I live, can only spend money from state taxes that it collects. Essentially that is what he was saying. When the economy is hot, spend what you get in taxes. When an economy is hot, The Treasury will manipulate securities to the point that more securities retire than printed, assuming The Government practices austerity, and that the economy is booming. This results in a decrease of national debt. Of course, there are other philosophies out there, but it is something to take note of and to think about.

For all who read this blog, I truly thank you. I hope you learn something, and at the foremost, I hope it makes you think. If you don’t agree, I just hope it made you think. We all strive to be better and smarter people. I hope you enjoyed your reading experience, and I hope you will continue to visit my blog.

I have to apologize. Some of the statements that I made in the previous post, on credit creation, were inaccurate. I have found out there is no “multiplier effect” with credit creation. Essentially there are multiple loans in the economy at one time, that are used in buying assets in many cases. During that moment, the money supply has expanded. However, when the loan is repaid, the principle amount of money has been destroyed. The interest the bank keeps. Only the central bank has the power to manipulate bank reserves, except for the added deposits from consumers. Banks cannot manipulate their reserves – they are only traded and manipulated based on deposits, or transactions from the central bank.

With that out of the way.

I am going to rewind to the financial crisis of 2008. I actually got really depressed, simply because I was so mad at the society around me. My family is struggling financially, and institutions that are responsible for risking an entire systemic crisis, are bailed out and kept alive. What about the American people? Jobs were lost. What was more displeasing was the fact that when someone was arrested for protesting, they got a felony. There was more though. The Fed bailed out institutions around the world for 17 trillion dollars. There was the stimulus package. Fox News replied by enacting fear, and started doing segments on the national debt. Through the fear of it all, everything settled, and it occurred to me. We didn’t collapse. What about the federal debt? Everything seems to be working fine with increasing government spending. Could the government debt not matter? How does The Fed have 17 trillion dollars? What about spending that on the American people?

So I started to search for an explanation. Along the way, I would piece together piece by piece what is really going on. I would have an overall theory, and time and time again it was wrong. But I pushed to learn more and more. I first learned about fractional reserve banking, and contemplated an economy based upon that. I mean, it has been the accepted theory of banking even in my macroeconomics class. But recently, I have found out that the current theories on Quantitative Easing, which are based on fractional reserve banking, are flat out inaccurate. My previous post, albeit with some miss information (my theorizing was inaccurate), empirically showed that banks create credit from nothing.

With more digging, it was like Neo searching for something called The Matrix. I was searching for MMT, or Modern Monetary Theory. The theory is complex, and will take some time to get a grasp on. But once I have an idea on how commercial banks, central banks, and their respective governments interact with one another, I can say I have a general idea on how the economy works. And that to me, would feel good. To the reader, I hope you understand this is going to be a journey, and I am going to record it. Along the way, I may say somethings that are inaccurate. I will do my best to be as accurate as possible, but part of the process for me is to fill in the blanks so to speak, until I can verify if those blanks are accurate. It’s part of the process.

And so, to the entree of the post. I read a paper on the interaction of the banks among themselves, as well as on the influence of the central bank. I learned what actual Quantitative Easing (QE) really is.

A bank basically has assets and liabilities. On the assets side, is paper currency and reserves – while on the liabilities side is deposits. It makes sense. The bank is responsible for everyone’s deposits, so therefore they are a liability. Let’s take the first scenario, where a bank issues a loan to a consumer that banks with the same bank. The newly credited loan, is considered an asset. When the loan is issued to the consumer, there is a deposit matching the value of the loan. Therefore, liabilities goes up. And, the bank takes a percentage, the rumor on the internet is it is around 10 percent, of the loan amount to reserves.

In a more complex scenario, a loan is issued out to buy something, and then that money is deposited into another bank. When this happens, the issued loan is still an asset to the original bank. However the amount of the loan turns out to be deposits to the following bank. Deposits, are a liability. And, in order for the bank to cover this liability, about 10 percent of those deposits need to be placed in reserves. The reserve amount is transferred from the original bank to the following bank. Deposits are the main influence on bank reserves. When a bank is short on reserves, or even in excess of reserves, banks can transfer reserves among themselves. Reserves are in place by fiscal regulation, in order to satisfy consumer demand of their money. However there is still great mystery for me the role reserves play in the whole process.

For one, reserves don’t have to be cash. As this paper in particular put it, some banks have Treasury Bonds in their reserves for the appropriate amount of cash. I also read from a different source, that banks essentially have Mortgage-Backed Securities in their reserves. (ring a bell?) In other words, when money is put into the reserves, a “portfolio” is constructed, as I understand it. It is true that the interest on loans is a way the bank makes money. However, I’m starting to wonder if the banks uses its reserves as a means to accrue more wealth with financial instruments. It is true, that the reserves cannot be created nor destroyed by the bank, however I am wondering if the principle amount of the reserves are used to accrue more wealth, and the only way the principle amount is adjusted, is when there are new deposits. This, I am unsure of. Also, something noted that the paper didn’t cover, is the reserves are a fraction of the deposits. Where do the rest of the deposits go? If they remained to satisfy money demand, would that not make them reserves as well? But reserves are a fraction of total deposits. Where does all the deposit money go? It doesn’t go to loans, because loans are issued from fabricated credit. Does it go to the bank to be used? How do they use it?

As you can see, this paper does a great job showing the process of banking, but there is bad explanation in other areas. There is knowledge that is assumed to be known, that I don’t know. And as with anything when learning about MMT, once I learn more, I have more questions to be asked. It is going to be a long process. But it is a bear that I really want to tackle, and I’m going to record this growth over this blog.

With those questions aside, the paper makes a thorough case as to why banks have a limit to what they can loan out. The limits are:

Market forces constrain lending because individual banks have to be able to lend profitably in a competitive market.

Lending is also constrained because banks have to take steps to mitigate the risks associated with issuing new loans.

Regulatory policy acts as a constraint on banks’ activities in order to mitigate a build-up of risks that could pose a threat to the stability of the financial system.

-page 4.

This is important to understand. Because if you think about it, if banks can issue loans with fabricated credit, why couldn’t they just lend out as much as possible, to get the most interest?

First banks not only get paid through interest on their assets (loans), but they also pay interest on their liabilities (savings accounts). The whole idea is to receive more money from loans than they have to pay to their liabilities. This interest rate, the rate on the loans and savings accounts, are determined by the central bank, which we will learn is the ultimate “constraint” to money creation. Also one has to realize, it is very possible that loans created from a bank is deposits (liabilities) for the other. In which case, reserves change accordingly. I am going to assume for now the banks uses their money for themselves and invests with it, simply because why have fractional reserves? If the bank can’t use the rest of the liabilities, why have reserves? Reserves are rumored to be around 10 percent of deposits. So why not just keep all of the bank’s liabilities as reserves? The 10 percent rule I believe is in place to be able to provide money demands to the consumer base, while the rest the bank uses as means to accrue more wealth or pay for expenses.

Remember the interest rate on the loans vs. the savings accounts or deposits? Well if for instance, a bank were to issue out loans at a lower value to compete, they may receive more assets (the loans) but deposits are sent to another bank, whereby the first bank lowers their bank reserves. When looking at reserves, as well as the interest coming in and the interest paying out, they may have to start charging more interest on their loans, in order to make sure they can satisfy their consumer base. If a bank were to continually loan under market value, eventually they would run out of reserves, and could not function as a bank.

Another variable on what determines when and how much a bank lends, is their cash flow. Overtime, how much deposits does the bank receive? Over time, what usually is the amount withdrawn? If most of the bank’s deposits are withdrawn at one time, there is what is called “liquidity risk.” Since banks loan out for months to even a year, they very well could not have the money to satisfy the demands for the deposits.

And this is what I don’t get.

What about the reserves? If strictly speaking, reserves are a fraction of your deposits, once deposits are taken out of the bank, what happens to the reserves? I’m thinking that reserves are taken from the deposits. So if I deposit 100 dollars, 10 dollars are put in reserves. If I withdraw all of my 100 dollars, 10 dollars are removed from the reserves to satisfy the withdraw. So if many people are withdrawing most of their deposits at one time, most of the reserves are lowered. This lowers the power of the banks to lend (assuming this is correct). Because once a loan is issued, deposits are created somewhere else. They would have to send reserves to the bank receiving deposits. And if they are short on reserves, they are at risk to not being able to satisfy the demand on their liabilities.

Really this reserve system puts more risk on the bank, but I guess there is a chance that it makes more money, because they only have to have a fraction of reserves on hand. But yes, I’m still confused. It’s the learning process, right?

The obvious reason is next. Credit risk. If people have bad credit, a bank shouldn’t lend money out to them, because that would be too high a risk of the loan not being repaid.

There are two possible outcomes to money when it is issued out by banks. First, a loan that is paid to someone else, could use that money to payback their loans. This is called the “reflux theory”, because essentially money is being destroyed, and therefore having no effect on the economy. On the other hand, the loans to pay for something, when that person or business receives that money, if they don’t have outstanding loans, the money is spent through the economy. And, as it passes hands, it will continually be spent through the economy. It is the view in this paper, that this is an inflationary process. In other words, if bank loans aren’t destroying money, it is put out into the economy and expands the money supply, resulting in higher prices.

Onto the central bank. As with England’s policy, as this paper was written in the context of the British economy (economies with central banks essentially work the same), the government wants inflation to be at around two percent. So the central bank does practices to try and meet that two percent goal.

One interest rate that the central bank influences is the interest rates paid on the bank reserves that banks deposit into the central bank. Therefore, the amount of money that they make from reserves deposited to the central bank influences their issuance of loans. Also, the central bank is able to influence interest rates on loans that are sent through the money markets, which is basically banks and financial institutions. These different interest rates have different “maturities” and are felt throughout the banking sector. Ultimately, the interest rates put on reserves and the money markets have an impact on how much a bank is willing to lend.

Maturities – the state of being due.

The last section discussed in the paper, has to do with Quantitative Easing, or QE. In England, the central bank went to the private sector, and bought assets from corporations. It could of been an insurance policy, pensions, or what have you, and the central bank bought these assets with cash. The central bank therefore has assets to accrue wealth, and in turn these corporations have this access cash that they do not particularly want. Most will reinvest, while same may spend into the economy. In both cases, this stimulates the economy.

In the states I have heard things are done differently with QE. The Fed actually, by a mechanism that I can’t remember, increases the reserves of banks. This is in hopes will create a incentive for banks to lend out more money, and therefore stimulate the economy.

Here are the main questions that I have after this reading:

With the reserves being a ratio to deposits, what is done with the rest of the deposits?

Do banks pay an interest to the central bank for depositing their reserves, or does the central bank pay an interest on the reserves deposited to it? From the language of the paper, it is hard to discern either way. I hope one day I will find out.

Why is spending money inflationary? I got to get a pdf on variables that affect inflation.

How does The Fed increase bank reserves?

Are banks able to make their reserves a portfolio equal to the amount of reserves? Whenever reserves have to be released, they can either sell to get cold cash, or just trade the asset, assuming this is what they do. If they make a profit off of the assets, they can sell, but they cannot add to the principle of the reserves.

When banks send reserves to one another, is there interest associated with it? Does the bank that transfers the reserves, do they get an interest payment or does the bank receiving the reserves? I just don’t know from the paper that I read.

It seems as when there is anything you are trying to tackle intellectually, especially something as complicated as this, more questions are provided once you read the paper, and it seems more questions arise than questions that are answered. I’m not done reading about banks. I need a more thorough read on the practice of banks, but I think I’m going to dive deep into my next paper that is prepared, and it is over the central bank and the treasury. I don’t know if it is written in the context of The United States, but it has been told to me from multiple people, that really any economy that uses a central bank does the same thing. So I’m going to put this on hold, and learn how the central bank and treasury print money indefinitely. A key component to the Modern Monetary Theory.

As you see, it is a process. As I have stated earlier in this blog, I’m going to record the process of understanding this very complex theory. Getting into it, is showing to be intimidating. Every single time I read something I just have so much questions. I just hope one day I can read something about MMT and say, “Interesting. I get it.” And leave it at that. Only time will tell.